Money. Every business owner is in business to make it. Every business owner
knows it takes a lot of it to open their doors for business - and just as
much (or more) to keep them open.
In just the past two weeks I've received these questions from subscribers:
"I need expansion money but all of my cash is already tied up in the
current operation. What should I do?"
"I have a poor credit history but want to open a business. How can I
get the financing?"
"I (regretably) invested everything I had in a business that is going
nowhere fast. I have no money to promote it and am barely making ends meet.
I realize now that I underestimated my needs and don't want to give up --
I know I can make a go of it. How can I get the cash I need (fast) to keep
things afloat?"
We've all experienced some form of financial frustration, feeling like we
keep throwing money into the Giant Pit and wondering when we're going to see
a payoff. I am certainly not qualified to be giving financing advice. What
I can share with you are two things I learned when I wanted to finance my
own company:
1. There is a solution for every situation described above.
2. You need to figure out how much money you need before you can determine
which type of funding to pursue.
The good news is that each of the individuals who asked the above questions
did not indicate a desire to give up. And (in my opinion) an entrepreneur
with passion and conviction is a powerful asset. So for each and every one
of you with financial questions, here's my own personal outline for finding
business capital:
1. Educate Yourself 2. Evaluate Your Needs 3. Research the Options
Let's look at these individually.
1. Educate Yourself:
Yes, it's a mundane, time-consuming task but if you don't know what options
are available, you can't make informed decisions. Financial resources each
have different criteria for lending money. Bank loans, SBA loans, government
grants, private investors, corporate angels, venture capitalists - even family
and friends - all have specific rules and conditions for giving out money.
And the rules change on a continuing basis. The more you educate yourself
about what options exist, the sooner you'll be able to focus on the handful
that could actually turn into successful connections. Knowledge IS power,
so educate yourself as much as possible to understand the seemingly uncomprehensible,
and define a list of options.
2. Evaluate Your Needs:
Be realistic about how much money it will take to pull yourself out of your
situation and keep you moving forward. Use realistic figures when estimating
costs - don't just guess. Sit down and put together a budget as though you
already had the money available to you. Dole it out with a realistic - not
optimistic - eye. Potential lenders or investors will not praise you for "scrimping"
on your budgeting figures. Instead, they may question if you have a grip on
the realities of doing business! Make sure you show them you do.
3. Research the Options:
Based on the two items above, you will come up with a number of possible financing
options. Once you narrow your resource base, take the time to research their
credibility. Just because a company is IN business does not necessarily mean
the company does GOOD business. Remember that no financing source is giving
you money out of the kindness of their hearts (even relatives!) - there is
always something in it for them. Ask for references, call each one, and ask
a lot of questions. Check out the company with the Better Business Bureau.
When you're ready to enter into a contract, read the fine print. Understand
everything you are agreeing to. If you don't feel right about it, don't sign
it! Don't let your anxiety to "fix" your business cloud your good
judgment. If at all possible, spend the money to have a lawyer review the
contract.
Sidebar 1: Cash Flow Strategies and Financing Venues
Following are two lists. The first briefly outlines viable ways to increase
your cash flow. The second is a list of definitions for popular financing
options.
Cash Flow Strategies:
Business Incubators Business incubators are designed to encourage entrepreneurship.
They are usually comprised of organizing a facility to house a number of small
or growing companies and enterprises to share services such as secretarial,
accounting, meeting rooms, etc. The objective is to reduce some of the overhead
costs associated with a single- company facility and free up cash flow.
Credit Card Advances Borrowing from your credit cards is technically a financing
option since you incur debt and pay interest on your advance 'loan' amount.
However, because the tactic provides immediate access to funds and there is
no prequalification or application process, we are including this option as
part of the cash flow strategy list. Remember that this is a loan like any
other and failure to pay off the debt will result in bigger problems later
on.
Customer Prepay Offering discounts to customer who prepay can significantly
increase your cash flow. The cost of carrying unpaid accounts receivable can
be far more expensive than discounting for payment up front.
Inventory Clearance Sales If you have aging inventory taking up space in your
warehouse, clear it out! Off-season sales and first-come, first-served clearance
sales are a good way to raise quick cash.
Rental Arrangements Do you have office or warehouse/storage space that you
could section off and rent on a month-to-month, cash up front basis? Depending
on your business type, you may also find it beneficial to make some of your
products available on a short-term rental basis.
Trade and Barter A practice that has successfully existed for decade upon
decade is a trade and barter arrangement. Whenever possible, strike up mutually
beneficial trade agreements. Small businesses are prime candidates for this
type of product/service swap. By not having to use cash funds to pay out for
the services or products you need, you are able to free up cash that can be
better used for other parts of the business.
Vendor or Supplier Relationships If you have been a good, loyal customer to
your vendors and suppliers, these relationships can prove invaluable when
you are in a short-term cash-crunch. Companies that stand to benefit from
your success are often willing to make special arrangements. For instance:
ask for extended credit for a specific length of time. If you are normally
expected to pay within 30 days, ask for 45, 60 or 90-day extensions; renegotiate
equipment lease payments; or, ask for inventory on a consignment basis. Be
sure that whatever promises you make to your vendors for these leniencies,
you keep. You need to maintain the trust you've already built with these suppliers.
Financing Venues:
Conventional Loans Bank lending for small and growing companies appears to
parallel the health of the economy. When interest rates are low, banks are
more prone to rolling out the red carpet to small businesses. Finding conventional
financing has traditionally been a matter of opportunity afforded by current
economic conditions. However in the past few years, many banks have been promoting
themselves as 'your small business partner' and have begun to acknowledge
the revitalized growth of entrepreneurial businesses. When looking for conventional
funding, contact several banks. Each has its own set of specific criteria
for loan approvals and can tell you exactly what they'll be looking for when
they review your application. Listen to them carefully and ask questions if
you don't understand.
Short-term loans are also an option depending on your specific need for a
loan. Explore this option for purposes such as financing accounts receivable
for a short length of time (30-90 days), or to build a seasonal inventory
over a 4-5 month period of time. Banks grant short term loans based on your
general credit reputation and can be either an unsecured loan, or a secured
loan.
Corporate Angels Corporate Angels are a diverse population of individuals
who provide seed capital for inventors and start-up firms, and equity financing
for established small firms. Good candidates for corporate angel funding are
entrepreneurs trying to raise $100,000 to $1,000,000 for ventures that are
unlikely to be publicly held or acquired by a larger firm within a five to
ten year time period. Thus, they do not attract venture capital investors.
According to the Office of Small Business Research and Development of the
National Science Foundation, angels tend to invest close to home. They like
to stay in touch with ventures they finance, often providing invaluable guidance.
Factoring (Accounts Receivable) Financing Factoring is a term used to borrow
against your expected income (accounts receivable) for immediate cash. With
hefty interest rates, this can be a costly means to raise capital. Thoroughly
investigate all of your options before choosing this type of financing.
Government Grants Both state and federal government grants are available to
small business owners. If you can get them, they're a great way to start or
grow your business. Grants are free money, not a loan, so you do not have
the added pressure of having to pay the money back. Each grant has its own
specific criteria for qualification and grants have a varied range of funding
amounts available, depending on the budgeted total allotment of the grant
program. Grants are available for specific industries, minorities, teenagers,
and inventions and research projects. This is a great resource with which
to start your search.
Issuing Stock If you have incorporated your business, your charter specifies
the amount of shares the corporation is authorized to issue. You may be able
to raise equity funds by selling shares of stock, making those who purchase
them part owners of your business.
Joint Ventures A joint venture is a business arrangement in which two or more
parties undertake a specific economic activity together. They are popular
with businesses interested in expansion and can help with cost-effectively
uncovering new markets, and create a new profit center.
Private Investors Private investors can be family members, friends, business
associates, etc. This is primarily any loan or financial assistance received
from individuals and not governed by state of federal regulation.
Purchase Order Financing Similar to Factoring, you can acquire interim financing
based on orders you have received from creditworthy customers.
SBA Loans The Small Business Administration (SBA) has helped thousands of
small companies through multiple loan programs to help them get started, expand
and prosper. By law, before you can use SBA assistance, an applicant must
first seek financing from a bank or other lending institution. Most banks
offer SBA loan assistance when the bank itself cannot provide funding. SBA
offers two basic types of business loans: guarantee loans and direct loans.
Guarantee loans are made by private lenders, usually banks, and guaranteed
up to 90% by SBA. The maximum guarantee percentage of loans exceeding $155,000
is 85%. SBA can guarantee up to $750,000 of a private sector loan.
Direct loans have an administrative maximum of $150,000 and are available
only to applicants unable to secure an SBA-guaranteed loan.
SBICs and MESBICs Small Business Investment Corporations (SBICs) are licensed
to provide financial services to small business in the form of equity/ venture
financing for modernization, expansion, etc. The SBIC usually seeks to purchase
stock in the company and become involved in actual business operations by
providing management direction. Minority Enterprise Small Business Investment
Corporations (MESBICs) provide identical financial support to small enterprises
that are minority-owned.
State and Local Funding State and local financial programs are an excellent
resource for small business funding. States and individual communities take
an active interest in maintaining a healthy economy through business development.
In addition to loan programs, numerous other programs may be of interest to
you such as network and support programs, export assistance, and state contracts.
For information, contact your local chamber of commerce.
Venture Capital While it is not impossible for new companies to receive venture
capital funding, it is unlikely. Venture capital supports firms that exhibit
above- average growth rates, a significant potential for market expansion,
and are in need of additional financing to sustain growth or further research
and development. Sources of venture capital financing include public and private
pension funds, commercial banks and bank holding companies, Small Business
Investment Companies licensed by the SBA, private venture capital firms, insurance
companies, investment management companies, bank trust departments, industrial
companies seeking to diversify their investments, and investment bankers acting
as intermediaries for themselves or other investors.
Venture Capital Limited Partnerships: Investors' money is pooled and invested
in money market assets until venture investments- primarily for young, technology-oriented
businesses-are selected. The general partners are experienced investment managers
who select and invest the equity and debt securities of firms with high growth
potential and the ability to go public in the near future.
Other Other creative ways to finance your business by relying on your own
assets include:
Take out a loan on your savings passbook. The bank will charge you interest,
but the funds you maintain on deposit in your account continue to earn interest,
which reduces the overall interest rate on the loan.
Take out a new or refinance an existing mortgage. If you own your own home
or other real property, you are able to refinance the mortgage you owe on,
or mortgage property that is already paid. Balance current mortgage rates
against your rate of return to ensure this option is viable.
Take out a loan against your life insurance policy. If you have a life insurance
policy that has accumulated cash value over the years, this could be a viable
option. Loans on such policies generally have a low interest rate.
Note: Be cautious about "creative" financing options that put your
personal financial security at risk. While these are quick ways to get the
cash you may need, remember that they are loans that must be paid.